Posted on 03/05/2013
In yesterday's article, we discussed the concept of combining high relative strength with low volatility. Specifically we talked about adding the PowerShares DWA Small Cap Technical Leaders ETF (DWAS) to the PowerShares S&P Small Cap Low Volatility Portfolio (XSLV). One of the benefits from this strategy is that it provides excess returns with very low correlation.
Another benefit of combing DWAS and XSLV is lower overall volatility (standard deviation) than traditional Small Cap indexes. Below is a graph of the 3-year rolling standard deviation for DWAS, XSLV, the combination and the Russell 2000 (RUT). Currently, the RUT has the highest standard deviation of all four while the XSLV, naturally, has the lowest. However, the 50/50 DWAS and XSLV portfolio shows the second lowest standard deviation around 17 while the RUT has a standard deviation in excess of 20.